Wait and See on Vanguard’s New TIPS Offering

by Dan Wiener | October 11, 2012 8:33 am

Vanguard’s new Treasury inflation-protected securities (TIPS) offering is set to launch, but I wouldn’t rush to buy it. The fund should be priced (probably at $10 a share) and open for investment as of yesterday, according to papers filed with the Securities & Exchange Commission.

The Short-Term Inflation-Protected Securities Index is both a traditional open-end mutual fund (MUTF:VTIPX[1]) and an ETF (NYSE:VTIP[2]). And, as I said when Vanguard first registered the fund with the SEC, in one sense you could see this as a money fund alternative[3], albeit one with a fluctuating share price.

But, with a 0.25% front-end load on the traditional mutual fund shares, I can’t see why anyone would take the fund over the ETF once it’s up and running. And that’s the rub — once it’s up and running. I wouldn’t want to be the first into this fund until the managers have a few dollars under their belts and the fund is completely operational.

And even then, you have to decide whether you’re buying this offering as a bond fund (it is) or a money fund substitute (it could be.) As Vanguard says, “The fund is designed for investors with a low tolerance for risk, but you could still lose money by investing in it.”

During the financial crisis, the index the fund tracks dropped 8.8% over three months and required a full 10 months to recover that loss. So, it certainly isn’t a money fund. On the other hand, the 2008 experience was a horrible one for inflation funds, with Vanguard’s existing TIPS fund dropping 12.5% during the period. In general, losses have been closer to 1% and have been recovered within a month or two. So, as a store of value with a bit of inflation protection, the fund may serve as a money-fund alternative for some investors.

The Short-Term Inflation-Protected Securities Index is based on the Barclays U.S. Treasury Inflation-Protected Securities 0-5 Year Index. You can find out more about the index, and iShares’ ETF (NYSE:STIP[4]) that tracks the same index, at the iShares website[5].